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The Greenbrier Companies, Inc. (NYSE:GBX)

F4Q09 Earnings Call

November 12, 2009 11:00 am ET

Executives

Mark J. Rittenbaum – Chief Financial Officer, Executive Vice President & Treasurer

William A. Furman – President, Chief Executive Director & Officer

Analysts

Steve Barger – Keybanc Capital Markets

John Parker – Jefferies

Frank Magdlen – The Robins Group

J. B. Groh – D. A. Davidson & Co.

Arthur W. Hatfield – Morgan Keenan & Company, Inc.

Operator

Welcome to the Greenbrier Companies fourth quarter and fiscal yearend earnings conference call. Following today’s presentation we will conduct a question and answer session. Until that time, all lines will on a listen only mode. At the request of the Greenbrier Companies, this conference call is being recorded for instant replay purposes. At this time I would like to turn the conference over to Mr. Mark Rittenbaum, Executive Vice President and Chief Financial Officer. Mr. Rittenbaum you may begin.

Mark J. Rittenbaum

Welcome to our fourth quarter conference call. I’m joined today by Bill Furman, our CEO. We will both have prepared remarks and then we’ll open it up for some questions. As a reminder, matters discussed on this conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of ’95. Throughout the discussion today we will describe some of the important factors that could cause Greenbrier’s actual results in 2010 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier.

Today we reported our results for our fourth quarter ended August 31, 2009. Net earnings were $6.7 million or $0.37 per share on revenues of $230 million. Results for the quarter included severance costs, right off of loan fees and warrant amortization expense aggregating $2.5 million net of tax or $0.14 per share. The results also include tax benefits of $6.8 million or $0.37 per share related to reversal of a deferred tax liability and a deemed liquidation of a foreign subsidiary of tax purposes.

We continue to manage the company with an eye towards cash flow and liquidity and our cash balances at the end of the quarter were $76 million. We had $106 million of committed additional borrowing capacity. During the quarter we reduced net debt by an additional $35 million bringing the total net debt reduction for the year to $102 million. We expect to remain out of our domestic lines of credit until market conditions improve or until appropriate opportunities avail themselves.

Now, let me address some highlights for the quarter. I will not go in to detail as each segment as that information was provided in the earnings release. Summing up, our aggregated gross margins reached 14% for the quarter, the highest level this year. The sequential increase over Q3 was primarily due to stronger performance from our manufacturing and leasing and services segments. Margin for the second half of the year nearly doubled that of the first half.

In our refurbishment and parts segment we experienced a sequential decline in revenue principally as a result of lower wheel volumes and current economic environment. Our gross margin of 13.1% was a slight improvement from Q3 and we currently anticipate margins should stabilize around 12% to 14% range in 2010.

Our manufacturing operations experienced a significant improvement on gross margin on a sequential basis on a slight increase in revenue and our performance exceeded our expectations. The sequential margin improvements was the result of continued strong performance by marine and improved performance in both our North American and European new rail car operations. During the quarter we consolidated new rail car production in North America at our joint venture facility in Mexico Gunderson GIMSA and we temporarily closed our Concarril facility until market conditions improve. In our facility here in Portland Oregon we will continue to focus on railcar refurbishment and marine during these down times.

By consolidating our new railcar production in North America, we realized continued efficiencies from operating at high production rates in GIMSA while minimizing overhead costs at our Concarril facility which is a leased facility. Based on our current production plans, approximately 2,400 units in our backlog are scheduled for delivery in fiscal 2010. We shipped 3,700 cars in 2009 and obviously we do have open production space for more orders in 2010. In 2010 we would hope to achieve low to mid single digit margins in our manufacturing segment.

Turning now to leasing and services, our fleet utilization was 88.3% at the end of the quarter compared to 92.1% at the end of our third fiscal quarter and 95.2% at the end of our fourth quarter of ’08. Performance of the lease fleet remains under pressure from the effects of a weak economy as there still remains a large number of units in North America overall that are idle and we have a strong focus on keeping our cars on lease and we believe that our lease fleet utilization is stabilizing.

Our leasing and services margin of 48.1% increased significantly from Q3 margin of 34.1%. This increase was due in part of gains on sales of equipment of $1.2 million in the current quarter compared to a loss of $.4 million in the prior quarter. Again, that loss in the prior quarter was a bit of an anomaly due to a unique event. In addition, the current quarter benefited from higher earnings on certain utilization leases in a reversal of certain maintenance reserves on terminated leases.

In 2010 we current anticipate margins will run around 40%. Our selling and administrative expenses increased sequentially from Q3 principally due to a write off of receivable subject to a contract dispute I want to emphasize that is not due to deterioration in credit of our receivables but due to a unique event where we wrote off a receivable. We expect selling and administrative to run about $17 million per quarter in 2010. Interest expense was $12.3 million which was a sequential increase from $10.7 million in the prior quarter principally due to write off of loan fees of $.9 million and warrant amortization expense of $1.1 million.

In 2010 excluding any foreign exchange gains or losses which are hard to predict, we expect interest expense to run about $11.5 to $12 million per quarter and about $2.9 million of this expense is from three non-cash items which I’ll go in to a little bit more detail on all three of these non-cash items which aggregate $2.9 million will run through the interest expense line. First, in conjunction with our W.L. Ross investment we issued warrants at $6 a share. These warrants were placed at fair market value on our balance sheet at $13.4 million and they’ll be amortized over the next three years at a rate of about $4.5 million per annum and also to the extent our average stock price exceeds the warrant strike price the number of diluted shares will be increased as was the case this current quarter.

Secondly, we’ll incur amortization expense of about $2.8 million per year related to the amortization of fees and expenses associated with the refinancing of our bank lines and with the W. L. Ross financing. Then lastly, there’s a new account pronouncement starting September of 2009 related to our convertible bonds where we’ll associate a debt discount of $17 million on the balance sheet and this $17 million will be amortized through May 2013. In the current year that will be about $4.1 million of amortization expense.

Summarizing this all up, as we noted in our press release we do expect an increase in EBITDA on lower revenues this year and that we expect that these non-cash charges that I just discussed related to the warrant and the debt discount will be $0.27 per share. We continue to be disciplined in our cap ex given the current environment and our cap ex in 2009 was a little over $23 million and we current expect it to run about $30 million in 2010 and our depreciation and amortization expense in 2010 will run about $40 million.

With that I’ll turn it over to Bill Furman.

William A. Furman

Well, despite some business in the numbers for the quarter both plus and minus, we had a very solid fourth quarter driven by stronger performance as Mark indicates in our manufacturing, leasing and services segment. I’m very pleased to see us continue to increase our liquidity. I was pleased during the year with our strategic investment with W. L. Ross which allowed us to renegotiate our banking lines and really reduce the risk in the company.

I’m going to contain my remarks this morning to just some comments about the economy and our industry, touch on some highlights for the year as I think that’s important to see the forward movement that we’ve made towards achieving liquidity and safety goals for shareholders and shareholder value, to talk a little bit about our specific tactical objectives going in to 2010 and the execution to our long term strategy. Then, we’ll open this up for questions in a few moments.

First of all, turning to the state of the industry, we continue to be very optimistic about the rail industry. Our customers and especially the rail companies themselves have demonstrated relative resiliency throughout this recession and we believe that as an economic recovery or whatever passes for an economic recovery takes hold it will translate in to new railcar orders and higher levels more importantly for us of leasing, refurbishment, repair, wheel and other services which we have been mutating towards in the last several years.

Even though the present market remains very weak, we’ve recently seen and earlier in the year very important and savvy investors working in to the rail space, investors like Wilbur Ross in Greenbrier and more recently William Buffets’ position in B&I. Both indicate strong confidence in the rail industry and I think that confidence is based on solid demographics as well as history. Despite that, record fleet storage statistics still have abated only slightly. These are at very high levels compared to the total industry fleet. Railroad loadings while slightly improved by about 10% from recent levels from 20% to 18% are still at a very big discount from a year ago.

So, while things have improved slightly they remain rather difficult in the near term especially as it relates to new manufacturing. Current industry backlog is now only about 19,000 cars but amazingly Greenbrier has about two thirds of this background if we count the GE order. Historically Greenbrier’s market share has always increased during a downturn but this is the largest share we have ever had so far and naturally we must resolve our issues with GE but we continue to work on that and I am reasonably optimistic that some accommodation can be reached.

Our integrated business model with its emphasis on railcar services touches points in the life of a freight car from cradle to grave and it’s clear to me that Greenbrier has unique visibility in to this market. So, from our view point the environment remains challenging for manufacturing. The confluence of all these events has significantly and adversely affected the demand for new railcars in the immediate term. Railcar operators continue to postpone scrapping decisions which means that an increasing number of obsolete and older railcars are likely sitting idle instead of being scrapped. This will change quickly as the economy shows real strength in an improvement.

Railcar velocity remains very high in the downturn again, a normal thing meaning fewer cars are required to haul the same number of ton miles during normalized economic activity and once again, that will change once normalized activity resumes. Other fundamentals that we all know about to support rail in the long term including green initiatives and fuel efficiency compared to trucks and perspective public policy. If new Congress and administration is serious about these things all of these should favor rail transportation and therefore rail supply companies.

A prominent investor said recently that our country’s future prosperity depends on having an efficient and well maintained rail system and we agree. Rail transport is significantly more efficient in terms of time and energy usage as it reduces highway congestion and in addition rail infrastructure costs less to build and maintain than highway infrastructure. Finally, rail carries it’s full social and economic costs compared to trucking which has been heavily subsidized by pass national and state transportation policies.

Let me turn for a moment to 2009. While it was a turbulent and challenging year for our industry, Greenbrier was able to realize number of strategic accomplishments including first the delivery of our initial tank cards in North America to very high quality standards. We are very proud of this achievement at our joint venture facility at GIMSA in Monclova Mexico. Secondly, we experienced significant growth in our fleet of managed units. Growing this fleet from about 135,000 units at the end of last year to almost 220,000 units this year, an increase of about 85,000 units.

Third, we had a record year in our marine operations and fourth, the strategic investment by W. L. Ross & Company allowed us to restructure our balance sheet and renegotiate our bank lines of credit, address issues with covenants in long term debt instruments and other moves that have increased liquidity and increased safety with respect to shareholder value. I think it’s clear that over the year these changes have been reflected in the stock price and we hope to do a better job in 2010 in that regard.

Turning for a moment to our refurbish and parts business which has 38 locations at the end of the year, this represented about 45% of our total company revenues for the fourth quarter. Gross margin percentages for the segment was up but down in terms of percentage to 13.1% but down slightly in actual dollars as Mark had indicated earlier. Lower volumes in net scrap pricing as well as a less favorable mix of repair and refurbishment has had an adverse affect on that segment revenue but we see the potential for a significant rebound not only by the number of cars that will have to come out of storage to be repaired in the system as the economy recovers but also a weaker US dollar and higher scrape prices anticipated in 2010 are expected to favor our wheel business in this repair refurbishment and wheel segment.

Finally, looking at our manufacturing segment, we continue – and this isn’t finally because we have leasing as well, it continues to be down year-over-year but sequentially performance was up and the decline in demand has led us, as Mark said, to focus our new railcar production at one facility in Mexico, at our GIMSA and at Gunderson in the United States. We are a US company and I think it’s important to remember that in perilous economic times it’s essential that we keep balance in our manufacturing platform. We’re very pleased with our investment in Mexico but we’re equally pleased that we have a strong base of employment in North America through our US operations and looking at Mexico, Mexico operates principally as an assembly plant with most of the materials value added from the United States with US labor.

During this quarter we were able to add 400 basis points to manufacturing gross margin which reached 8.6%. These gross margin improvements reflect significant marine labor efficiencies and more favorable railcar mix. They were offset somewhat by lower plant utilization levels. Finally our leasing and services segment while it continues to be under pressure is a very good base of operations for our integrated business model. This segment includes our owned and leased fleet, 9,000 railcars owned and a total of 226,000 railcars counting the managed fleet. Mark has addressed the utilization issues we face in that fleet but we hope the bottom is near in that cycle.

Greenbrier continues to execute its long term strategy of diversification of revenue. Only a few years ago our business was concentrated almost entirely on the cyclical new railcar market, a problem faced now by almost all our competitors in this space. In a more integrated business model investors can now think of Greenbrier as adding value throughout the life of a railcar, literally as I said earlier from the cradle to grave of a railcar, something that has a 50 year life.

We successfully assimilated the business that we acquired last year. However, we still have much room to improve in the integration of our business segments. With our business model Greenbrier is much less exposed to drastic and dramatic market swings as we would have been had we remained strictly in the manufacturing space. Overall, we are very well positioned to serve customers as a strategic vendor. An example is our recent order for 100 cryogenic railcars being built at Gunderson, a transaction which benefits all of our operating units: manufacturing; services; and leasing aggregating a very significant gross margin compared to what we might have imagined had we only been looking at building the car and not providing other services.

Looking ahead in 2010 our first objective tactically is to arrive at a final resolution regarding the GE contract and to stabilize our backlog at acceptable levels. We expect to be able to operate GIMSA at a reasonable level and we are hopeful that we will be able to reach a resolution of the General Electric contract in the 2010 fiscal year. Secondly, we plan to improve the operational efficiency of our facilities while maintaining the flexibility to respond to market demand when the new cycle begins so we will continue to focus on tactical things that need to be done to improve our operating efficiencies.

Third, as mark has said we will continue to manage for cash flow and liquidity, we’ll aim to further improve our balance sheet and pay down more debt than we did in fiscal 2009. Finally, we expect to improve gross margins. We’ve taken significant strides to strengthen the company in the past year and are particularly pleased with our strategic relationship with W. L. Ross & Company. This relationship has allowed us to not only address liquidity and risk concerns in the capital structure of our company but it provides Greenbrier access to creative individuals and capital so that we may invest in future growth opportunities in a prudent manner. So, we see the W. L. Ross association as an opportunity for Greenbrier to hitch a ride with a very savvy investor.

In conclusion, I’m very pleased with the positive trends that began in the third quarter continued in the fourth quarter leading to a positive second half of the year. Our team is experienced with market cycles and while this recent downturn was more severe than most and is expected to continue to be severe, our experience has served us well. We’ve made many of the operational adjustments necessary to emerge as a strong company in the railroad supply industry as the economic landscape improves.

Mark, I’ll turn it back to you for questions.

Mark J. Rittenbaum

Operator, we will go ahead and open it up for questions if you can provide us instructions please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Steve Barger – Keybanc Capital Markets.

Steve Barger – Keybanc Capital Markets

In your comments you said you think the lease fleet is stabilizing, has your renewal rate improved since the quarter ended or can you talk about why you think it’s stabilizing?

Mark J. Rittenbaum

I think it’s the trend overall that we’ve been seeing over the last several months here where we are hitting our stride in keeping equipment on lease albeit at lower rates. We’re taking a proactive approach ahead of lease expirations and looking to extend leases and trade it for some rate while still trying to go as reasonably short as we can so that when the market returns we’ll get the benefit of that but it’s just based on hard facts of what we’re seeing at the ground level, those in the trenches.

Steve Barger – Keybanc Capital Markets

Can you talk about the change in the lease rate as you renew these cars versus where they were?

Mark J. Rittenbaum

It would really be on a case-by-case basis and car type by car type, there’s no doubt that rates are down but it’s hard to make just a global statement about how much they’re down.

Steve Barger – Keybanc Capital Markets

Is it fair to say they are down double digit just generally speaking 20%?

Mark J. Rittenbaum

That’s probably reasonable to say.

Steve Barger – Keybanc Capital Markets

More broadly speaking, I think OEMs with an aggressive leasing strategy should be able to generate more deals on a downturn like we’re seeing now than a non diversified OE or a pure financial lessor. I think they can just be more aggressive. Now that you have some new board members are you changing your thinking about the integrated OE/lessor model means from a competitive standpoint?

Mark J. Rittenbaum

Well, we certainly are adapting to the times and I wouldn’t want to leave you the impression we think everything is rosy out there at all. I think it’s improving sequentially slowly as most economic pundits are seeing. But, certainly we are going to adapt to this situation and you’re right leasing will give us more flexibility however, when you’ve got so many cars parked and you’re trying to manufacture new cars in competition with used cars and those cars are parked it is very, very difficult to make that math work.

It’s often much better to take a used car and refurbish it and work with it and convert it to something it’s not. I think this environment and the capital we have access with the creativity with the W. L. Ross investment that we have access to, I think that favors repair refurbishment in other parts of our business including leasing probably as much as it does manufacturing.

Steve Barger – Keybanc Capital Markets

Historically leasing has been a relatively small part of your business, do you intend to grow that? Your balance sheet is looking healthier so should we think that you would grow that lease lead over time?

Mark J. Rittenbaum

Have a look at what we’ve done in the last year and where we’ve been heading. We’ve been moving aggressively towards management services in leasing. We really have significantly, including the stable of services, we have significantly improved the tools and the transactional costs advantage that we have over the industry. We have almost an eighth of the national fleet under management at this point with many esoteric value adds that we provide to our customers. That gives us a unique visibility in to the marketplace so I think we’re more likely to use those tools along with prudent investment because we still are limited by capital on our balance sheet and we mustn’t forget that by2013 we have debt that will mature and we want to be sure that we’ll have money and be able to refinance those maturities as well as the 2013 maturities that are coming out. Time goes by quickly.

So, we’re going to focus not on just head on direct investments but we will be doing work to leverage our strengths and add to our asset base under management by getting also an equity participation in the transactions that we originate, syndicate and finally manage over the life of the cars. Of course when we do that it feeds right in to our repair and refurbishment business as long as we’re competitive on that business and the national network of shops that can literally not be duplicated in the current environment.

Steve Barger – Keybanc Capital Markets

That’s actually a good segue in to the next question, refurb and parts was down 15% sequentially on a sequential increase in railcar loadings. Are there market share issues there or can you talk about some of the market dynamics that exist in the refurb and parts market?

Mark J. Rittenbaum

We’ll have to move on to other questions but very briefly I don’t think it’s market share I think it’s the market. There’s a lot of deferred maintenance going on. To give you an example, a customer that has a bad order car is less likely to repair that car at a time like this when they’ve got surplus cars, they’ll just throw the car in to storage and pull one out that’s in serviceable condition. So, what’s really happening there is deferred maintenance, deferred refurbishment and I think building pent up demand.

Operator

Your next question comes from John Parker – Jefferies.

John Parker – Jefferies

On the last call you gave us an estimate of how many cars were currently in storage or parked, can you give us an update on what your view is and how many cars are in storage?

Mark J. Rittenbaum

Those estimates honestly are all over the map. I think we had estimated somewhere between 400,000 and upward number on the last call, I can’t remember.

John Parker – Jefferies

On the last call, just to refresh your memory, you said that 500,000 cars were possibly in storage but you thought the real number was closer to 300,000 with the remainder kind of going in and out of storage. Is that similar now?

Mark J. Rittenbaum

I would say that it is slightly improved but not materially improved. We’ve seen on the western railroads a lot of background noise with cars coming out, going back in. Coal has been especially somewhat erratic. But directionally, I think the number of stored cars may be down. Qualitatively it’s probably true that the number is higher but some of that is really false storage, there are a lot of obsolete cars so the railroad presidents whom I speak with continue to think that the core number is lower than the generally accepted 500,000 car scary number.

You’ve got to remember also, when the economy recovers velocity does something to that equation because it takes more cars to carry the same number of ton miles and a lot of scraping and paring out of the fleet and repair of that fleet will have to occur. In fact, that’s going to be a very significant logistic problem for shippers and railroads is getting equipment out of storage it’s just physically a very complicated and difficult thing with this much viscosity in the system today. It’s a very physical business and the very viscosity of storage is going to create problems for these railroads and for the shipper customers that will make opportunity for us.

John Parker – Jefferies

Can you give us any indication of where the barge revenues were and what’s your outlook is for next year?

Mark J. Rittenbaum

Our barge revenues for the quarter were somewhere around $20 million, maybe a little less than that. We still have a strong outlook for 2010 although a little bit down from 2009 but our barge business continues to be robust.

John Parker – Jefferies

Then you talked about the gain on your sale of your assets it seems like it would be a tough time to make a profit on sale of assets. Can you give us any color on how you had a gain as opposed to a loss on prior quarter and what types of assets those are and where they’re being sold.

Mark J. Rittenbaum

The loss in the prior quarter was really an anomaly. I think if you look at the prior quarter, our history, I can’t actually recall another time where we had – maybe once or twice where we’ve had a loss on the sale out of our leased fleet. There’s no doubt that our railcars are somewhat of commodities and their value goes up and goes down over time but we do have lower gains on sales during the downturns because we tend to want to sell less during the downturns as well. So, our average age of our fleet is about 18 years. We do anticipate and we regularly sell some assets out of the fleet and we still would expect to have some modest gains from sales out of the fleet in 2010.

John Parker – Jefferies

You guided towards sort of lower manufacturing margins next year and I assume that’s just because of lower deliveries expected at this point. I mean, you had a very strong fourth quarter but as the overall number is lower next year is that why you’re guiding towards slightly lower margins for the full year next year? Is that right?

Mark J. Rittenbaum

Yes, operating at lower production rates, a little bit of mix, but operating at lower production rates and frankly any new orders on the margin are not going to be particularly attractive. They’re more likely in this environment to make a contribution to overhead or very low margin on the increment.

John Parker – Jefferies

Then finally, the refurbishment and parts margin, maybe I missed it, you seemed to give us some guidance about next year for the other sectors or segments. Did you give any guidance on that or can you provide any guidance?

Mark J. Rittenbaum

On the margins I believe I said around the 12% to 14%. We would hope on the revenue side that we kind of reached a bottom at around the $100 million revenue level and as the economy picks up we would anticipate that we would start to see that grow again but the question is when will we see meaningful pick up in the economy.

Operator

Your next question comes from Frank Magdlen – The Robins Group.

Frank Magdlen – The Robins Group

On the delivers for next year, how many are going to be in Europe?

William A. Furman

A fairly nominal amount, less than 1,000 more than 500. I know that’s a big range but it’s somewhere in the middle of that number, probably a little lower between the median of those two numbers.

Frank Magdlen – The Robins Group

Then the balance is almost entirely GE or is that a combination?

William A. Furman

Our backlog certainly is heavily weighted towards GE. If we’re successful in resolving the GE conflict we would expect to have to compromise that backlog. However, Mark can address the actual numbers for next year which reflect a fairly solid domestic non GE content.

Mark J. Rittenbaum

Frank, there are orders in there other than GE on the domestic side and some meaningful orders in there.

Frank Magdlen – The Robins Group

Mark, what’s the tax rate you were using when you talked about the $0.27 net of tax on the amortization of fees, etc.

Mark J. Rittenbaum

40%.

Frank Magdlen – The Robins Group

Then, could you explain a little bit if you did change your pricing on contracts on the refurbishment and parts as to how meaningful scrap prices are for you going forward?

Mark J. Rittenbaum

Frank, I know we gave an algorithm in the past and test is lost on the tip of my tongue. We are somewhat capped on the upside of that but to date we’re definitely below where we’re tapped at so there is room for that. Let’s see if before the end of the call we might be able to come back to that, if not we’ll get back to you.

William A. Furman

Frank, realistically the earlier algorithm may not be applicable in a market like this and I think one of the assumptions is we have any control over pricing in an environment like this. There’s just not a lot of work out there and in fact your pricing it’s not that it’s so competitive it’s just the work isn’t there so we have to create that work by doing creative transactions. I think that’s one of our biggest challenges in 2010 and we historically have done that. But, it’s been a busy year and we haven’t done it this year.

Operator

Your next question comes from J. B. Groh – D. A. Davidson & Co.

J. B. Groh – D. A. Davidson & Co.

I just kind of hammer on Frank’s question, I think you’re saying 2,400 units scheduled for 2010 and you subtract out kind of the midpoint of that European number it looks like what you’ve kind of banked on in terms of GE is the lower production rate that they’re accepting cars at now, correct?

William A. Furman

They’re not really accepting cars at a lower production rate than had been scheduled. We have a ramping issue. I think the ramping has been delayed slightly but we’ve been increasing the production and they’ve been buying the cars. We’ve been shipping the cars and GE’s been buying the cars.

J. B. Groh – D. A. Davidson & Co.

And you’re still getting paid for them correct.

William A. Furman

Yes, we’re getting paid for them.

J. B. Groh – D. A. Davidson & Co.

Mark, how much pre-tax severance is in that manufacturing number or is it somewhere else?

Mark J. Rittenbaum

Not, it’s all in the manufacturing and the number I believe is $1.7 million for the quarter.

J. B. Groh – D. A. Davidson & Co.

That is all in the manufacturing segment?

Mark J. Rittenbaum

Yes.

J. B. Groh – D. A. Davidson & Co.

Bill, it seems to be that you seem to believe that there’s some kind of pent up demand for refurbishment and parts business in that stored number in that obviously a rail operator is going to store cars that are close to some sort of maintenance interval. Is that a pretty safe assumption?

William A. Furman

Well, I think for a company like Greenbrier, it’s true but we’re in a position, particularly now with more liquidity and a strong strategic partner to monetize demand that might not be able to be monetized by others. We have amazing engineering capabilities through our manufacturing segment so we can take cars that are not useful in one type of service and convert them to something else with the engineering and capabilities that we have. So, I think that if we step in aggressively and this is a perspective statement of course, a hopeful statement, and become more proactive in 2010 that we should be able to move the bar on that.

I also say that it’s a fair question that there is developing in the fleet of cars a lot of just heavy static with obsolete cars being stored, cars that are actually physically loaded with scrap. With low scrap prices and the expectation of higher commodity prices and the lower dollar, people aren’t selling it. When they start moving this stuff it’s going to be a very interesting situation. I think it creates a tremendous opportunity for companies that are in the scrap business like Progress and Schnitzer. I think it creates tremendous opportunities for companies like Greenbrier that can help the railroads with those kinds of issues and help shippers with those kinds of issues. They are very, very real physical issues.

J. B. Groh – D. A. Davidson & Co.

When you talk about conversion work is it more than just cut down work? Is there other things that you can do? Maybe you can give us an example of something there?

William A. Furman

Well, cut down work is a very good example actually of what you’re talking about because we’re taking cars that are 48 feet in length for containers and cutting them to 40. We’re also expanding cars, we have the capability of expanding cars from 48 to 53 foot units to go to a domestic market. That is actually a good – and you have to use finite element analysis engineering to convert one car type to another. It’s not as simple as it sounds. Other kinds of equipment, [inaudible] box cars that have specialty doors or specialty applications particularly mechanical refrigerator cars, they’re all targeted to certain narrow markets and if you can convert one application in to another while they still look the same to an ordinary observer, they’re quite differently mechanically and from an engineering perspective.

Those kinds of things are easy for us to do because we have a broad product mix across now with tank cars, almost all of the kinds of railcars that are built in America, or designed in America, or engineered in America, or serviced in North America. I think it gives me tremendous flexibility. We are not in the coal car engineering business but we have access to good coal engineers and we do a lot of leasing of coal cars. So, we really can hit on all the points that are necessary to achieve total coverage in the North American economy particularly. We are not quite as well positioned, although we’re going to position ourselves we think in Europe to do the very same thing.

J. B. Groh – D. A. Davidson & Co.

One last housekeeping thing, Mark you had mentioned a $40 million D&A number for 2010. Does that include all the amortization from the warrants and loan fee and the new convertible rules, all that stuff is included in that $40 million?

Mark J. Rittenbaum

That’s an excellent question Steve and the answer is no. The D&A expense is related specifically to either depreciation or amortization of intangibles. Any of the amortization of the interest which I gave is not included in that number.

J. B. Groh – D. A. Davidson & Co.

$1.4 million?

Mark J. Rittenbaum

Yes, exactly.

J. B. Groh – D. A. Davidson & Co.

So you basically have non-cash of $51.4 million, something like that?

Mark J. Rittenbaum

Yes.

Operator

Your next question comes from Arthur W. Hatfield – Morgan Keenan & Company, Inc.

Arthur W. Hatfield – Morgan Keenan & Company, Inc.

Mark, I apologize but when you were going over the numbers today I wasn’t able to keep up and I missed your talking about how to think about the share count in the quarter and how we should think about that going forward with regards to earnings calculations?

Mark J. Rittenbaum

The calculation with the number of shares in the warrants time the $6 strike price and then divided that by the average market price for the stock for the quarter. As long as the average stock price exceeds the $6 that number of shares would be the incremental number of shares in the diluted shares outstanding.

Arthur W. Hatfield – Morgan Keenan & Company, Inc.

Then secondly, I know you walked through kind of where you are from a production standpoint but I want to kind of ask a forward thinking question and let’s say we get to a point in life where instead of producing 500 to 600 cars a quarter all of a sudden you’re flexing up to 1,500 to 2,000 cars a quarter can you talk about how easy that would be to do and kind of what, if any, upfront cost you would need to put in place to get that higher level of production?

William A. Furman

Let me take a quick shot at that, obviously we would have working capital. Much of the cash that has been generated has been by very tight management of working capital so there would be working capital. We feel we have adequate complementary liquidity to address that where and when those circumstances occur. Except for that, reopening the Concarril facility would be fairly easy. We can switch that facility on and off fairly easily however longer term we still have some issues there because we don’t own that facility we lease it from Bombardier. But, in the short term the next five years we expect that we would have a lot of flexibility in moving up in terms of our production without a lot of fixed costs.

Operator

Your next question comes from Steve Barger – Keybanc Capital Markets.

Steve Barger – Keybanc Capital Markets

When I look at industry orders of about 75% in the quarter were for tank cars. Other than the GE order, have you received any additional tank car orders or are you quoting prices to third parties?

William A. Furman

No, nor can we. Until we resolve the GE issue we are locked in to an agreement and that agreement requires all of our capacity in tank cars at that facility during the relevant time frame. That’s not a bad thing necessarily at all.

Steve Barger – Keybanc Capital Markets

My follow up is it seems like your tone vis-à-vis your conversations about GE are a little more positive this quarter than last. Is it far to say you’ve made progress in whatever conversations are taking place there?

William A. Furman

I really can’t comment other than I’m by nature more optimistic than Mark. I think it’s basically important to realize that we haven’t had a huge explosion. We have had a lot of contention, we continue to talk, we continue to ship cars, they continue to buy them. Just the passage of time gives me some comfort that there’s hope. One has to always be hopeful that we can resolve this. There must be some reason that we have not had the explosion by now but we are always waiting to see if there will be one.

Honestly, GE is a good company, if you watch their advertisements and all we’ve ever asked is that they be like they appear to be in the market. I think we have GE’s attention and they have our attention. Misunderstandings by their nature are difficult and each party contributes to them so we have to just be hopeful about this.

Operator

I am showing no further questions at this time.

Mark J. Rittenbaum

Thank you for your participation in today’s call. We appreciate it and we’ll look forward to talking to you again. Have a good day.

Operator

This concludes today’s conference. You may disconnect at this time.

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Source: The Greenbrier Companies, Inc. F4Q09 (Qtr End 10/25/09) Earnings Call Transcript
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